Fundamentals of Financial and Cost Accounting · Accounting Cycle

How to Prepare a Bank Reconciliation Statement

Updated 10 October 2026 · Fact-checked

A **bank reconciliation statement (BRS)** explains the difference between the bank balance in your cash book and the balance in the bank's passbook. Start with one balance, add or subtract each item that explains the gap, and reach the other balance. Timing differences and unrecorded items cause the gap.

Understand Bank Reconciliation Statement

Your cash book (bank column) is your record of bank transactions. The passbook (bank statement) is the bank's record of your account. Both describe the same account, so you would expect the same balance. Usually they differ.

The gap arises for two reasons. First, timing differences: you recorded something that the bank has not yet processed, such as a cheque issued but not yet presented, or a cheque deposited but not yet cleared. Second, items the bank recorded that you have not, such as bank charges, interest, direct deposits by customers, or standing instructions. There can also be errors in either book.

A BRS is prepared to find and explain these differences. It is not a ledger account, and it does not change any book. Items that only the bank knows about (charges, interest, direct credits) must later be entered in your cash book. Timing items need no entry; they clear by themselves.

Remember the sign logic. In the cash book, a debit balance means money in the bank (favourable balance). A credit balance means an overdraft. In the passbook it is the other way round: a credit balance means money with the bank, and a debit balance means overdraft. Many exam mistakes come from mixing this up.

The exam asks you for the missing balance, or the adjusted cash book balance, or the effect of one item. A fixed method and a small table of signs will solve all three.

Key formulas to remember

Starting from a favourable cash book balance: Passbook balance = Cash book balance + Cheques issued but not presented − Cheques deposited but not yet credited + Bank credits not in cash book − Bank debits not in cash book; Use this when the cash book shows money in the bank (debit balance). The cash book here is the balance before bank-only items are entered. It reaches the passbook balance.
Starting from a favourable passbook balance: Cash book balance (before bank-only items are entered) = Passbook balance + Cheques deposited but not yet credited − Cheques issued but not presented + Bank debits not in cash book − Bank credits not in cash book; Use this when the passbook shows money in the bank (credit balance). It is the exact reverse of the first formula. Bank-only items are already in the passbook, so you take them out to reach the cash book as it stands.
Overdraft rule: For an overdraft, treat the balance as negative and apply the normal signs. Or keep it as a positive overdraft and reverse the sign of every adjustment. Never do both.; The same list of items is used. The adjustments do not change direction because of an overdraft; the starting balance is simply negative. Both methods give the same answer. Using both together gives a wrong answer.
Items that raise the cash book: Direct deposits, interest and dividends collected by bank, bank interest credited; Credited by the bank, not yet in the cash book. Adjust the cash book upward.
Items that lower the cash book: Bank charges, interest on overdraft, insurance premium or EMI paid by standing order, dishonoured cheques; Debited by the bank, not yet in the cash book. Adjust the cash book downward.
Timing items need no entry: Cheques issued not presented and cheques deposited not cleared; They only appear in the BRS. They never need a cash book entry.

How to solve Bank Reconciliation Statement questions

Use this method for any BRS question. Decide the starting balance first, because everything else follows from it.

1Read the question and note which balance is given (cash book or passbook) and whether it is favourable (money in bank) or overdraft.
2Choose the starting balance. It is normally the one given. Write it as the first line.
3List every item and ask: is it a timing item or an item the bank recorded that the cash book has not?
4Decide the direction of each item with the sign table. For a favourable balance, ask whether the item would increase or decrease the bank's balance.
5For an overdraft balance, write it as a negative number and use the same signs as before. Do not also reverse the signs.
6Add and subtract to reach the other balance.
7Check the answer: the result should equal the other book's balance given or required.
8If the question asks for the corrected cash book balance, adjust only for items the bank recorded and errors in the cash book. Leave timing items alone.

Quickest way: The Sign Table Method

When to use it: Use in MCQs where you need the missing balance quickly. It takes under a minute per question.

Write the starting balance. Mark it F for favourable or O for overdraft.
If starting from the cash book and reaching the passbook, think what the bank still has to do. A cheque issued but not presented will still reduce the bank balance, so the bank balance is higher. A cheque deposited but not cleared will still increase the bank balance, so the bank balance is lower.
If starting from the passbook, reverse the direction of the timing items.
For bank-only items (charges, interest, direct credits), they are already in the passbook. Going from cash book to passbook, add credits and deduct debits. Going from passbook back to the cash book as it stood before these items were entered, do the opposite: deduct credits and add debits.
For an overdraft, pick one method. Either write it as a negative number and add and subtract with the normal signs, or keep it as a positive overdraft and reverse all signs. Never do both.
Compare your answer with the four options. Discard any that move in the wrong direction.

Common mistakes in Bank Reconciliation Statement

Adjusting the cash book for cheques issued but not presented
Students think every item in a BRS needs a journal or cash book entry.
Fix: Timing items are already in the cash book. Use them only to reconcile. Adjust the cash book only for items the bank recorded first.
Adding a cheque deposited but not cleared when going from cash book to passbook
The cheque feels like money received, so it feels like it should be added.
Fix: The bank has not credited it yet, so the passbook is lower than the cash book. Subtract it when moving from cash book to passbook.
Misreading an overdraft as a favourable balance
The words debit and credit are opposite in the cash book and the passbook.
Fix: Mark the starting balance F or O before you begin. For O, write it as a negative number and use the normal signs. Do not also reverse the signs.
Forgetting bank charges and interest the bank has recorded
These items are not in your records, so they are easy to overlook in a long list.
Fix: Scan the question for charges, interest, direct deposits and standing orders. These are the only items that change the corrected cash book.
Treating a dishonoured cheque as a timing item
It looks like a cheque that did not clear.
Fix: A dishonoured cheque is a bank debit you did not know about. It reduces the corrected cash book balance.
Using the wrong direction for the two starting points
Students memorise one list and apply it to both situations.
Fix: If you switch starting point, switch every sign. Test with one item to check.

Worked examples

Example 1

The cash book of Meera Traders shows a bank balance of ₹50,000 (debit). Cheques issued for ₹8,000 have not been presented. Cheques deposited for ₹5,000 have not been cleared. The bank has charged ₹300 as bank charges, not yet in the cash book. What is the passbook balance?

Show the solution

Start with the cash book balance: ₹50,000 favourable.
Add cheques issued but not presented: ₹50,000 + ₹8,000 = ₹58,000.
Subtract cheques deposited but not cleared: ₹58,000 − ₹5,000 = ₹53,000.
Bank charges are already in the passbook but not in the cash book. Going from cash book to passbook, subtract them: ₹53,000 − ₹300 = ₹52,700.

Answer: Passbook balance = ₹52,700 (credit).

Example 2

The passbook of Arun & Co shows an overdraft of ₹20,000. Cheques issued for ₹6,000 have not been presented. Cheques deposited for ₹9,000 have not been cleared. The bank has credited ₹2,000 as interest not yet in the cash book. What is the cash book balance before the interest is entered?

Show the solution

Treat the overdraft as a negative figure: −₹20,000.
Starting from the passbook, add cheques deposited but not cleared: −₹20,000 + ₹9,000 = −₹11,000.
Subtract cheques issued but not presented: −₹11,000 − ₹6,000 = −₹17,000.
The bank has credited interest that is already in the passbook but not in the cash book. Going from passbook to the cash book as it stands, subtract it: −₹17,000 − ₹2,000 = −₹19,000.

Answer: Cash book shows an overdraft of ₹19,000 (credit balance) before the interest is entered. After entering the ₹2,000 interest, the cash book overdraft becomes ₹17,000.

Exam tips

Mark the starting balance as favourable or overdraft before reading the list of items. This avoids most sign errors.
Questions often ask only for the final balance. Do not draw a full statement. Use the sign table in rough work and move on.
Watch for the phrase that tells you the direction, such as from the cash book to the passbook. Then check the direction of each item once.
Look for items that change the corrected cash book, such as bank charges, interest and dishonoured cheques, and separate them from timing items.
There is no negative marking, so always attempt every question. If unsure, eliminate options that move in the wrong direction and guess from the rest.

Practice questions from Accounting Cycle

Bank Reconciliation Statement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bank Reconciliation Statement: frequently asked questions

Why does the cash book balance differ from the passbook balance?

The two records are kept by different parties and at different times. Cheques issued but not presented and cheques deposited but not cleared are timing differences. Bank charges, interest, direct deposits and dishonoured cheques may appear in the passbook before they reach your cash book. Errors in either book also cause differences.

Is a bank reconciliation statement part of the ledger?

No. It is a separate statement prepared to explain the difference. It does not change either book. Only items the bank has recorded and you have not need to be entered in the cash book.

What is the difference between a favourable and an overdraft balance in a BRS?

A favourable balance means there is money in the bank. An overdraft means you owe the bank. In the cash book, a debit balance is favourable and a credit balance is an overdraft. In the passbook it is the reverse. For an overdraft, treat the balance as negative and apply the normal signs. Or keep it positive and reverse all signs, but do not do both.

Which items need a cash book entry after preparing a BRS?

Only items that the bank has recorded and the cash book has not, such as bank charges, interest, direct deposits, standing order payments and dishonoured cheques. Cheques issued but not presented and cheques deposited but not cleared need no entry, because they are already in the cash book.